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Tax Facts for 2014

By October 26, 2014No Comments

Although there is more certainty afforded for 2014 tax planning due to the many permanent tax incentives provided by the 2012 Taxpayer Relief Act, higher income individuals must carefully structure their financial transactions in order to minimize their tax burden.We have listed below updated information on many hot tax topics.

Higher Tax Brackets

Married Filing Jointly (& Surviving Spouse)

Tax Rate  2014 Taxable Income
10%  $0-$18,150
15%  $18,150 – $73,800
25%  $73,800 – $148,850
28%  $148,850 – $226,850
33%  $226,850 – $405,100
35%  $405,100 – $457,600
39.6%  $457,600+

Unmarried Individuals (Other than Surviving Spouses & Heads of Households)

Tax Rate  2014 Taxable Income
10%  $0-$9,075
15%  $9,075 – $36,900
25%  $36,900 – $89,350
28%  $89,350 – $186,350
33%  $186,350 – $405,100
35%  $405,100 – $406,750
39.6%  $406,750+

Head of Household

Tax Rate  2014 Taxable Income
10%  $0 – $12,950
15%  $12,950 – $49,400
25%  $49,400 – $127,550
28%  $127,550 – $206,600
33%  $206,600 – $405,100
35%  $405,100 – $432,200
39.6%  $432,200+

Married Individuals Filing Separate Returns

Tax Rate  2014 Taxable Income
10%  $0 – $9,075
15%  $9,075 – $36,900
25%  $36,900 – $74,425
28%  $74,425 – $113,425
33%  $113,425 – $202,550
35%  $202,550 – $228,800
39.6%  $228,800+

Standard Deduction Amounts

Filing Status  Deduction
Married Filing Jointly (& Surviving Spouse)  $12,400
Single  $6,200
Head of Household  $9,100
Married Filing Separately  $6,200

Medical Expense Deduction

The Medical Expense Deduction on Schedule A consists of deductible expenses that exceed 10% of AGI. Taxpayers or their spouses who are 65 or older before the close of the tax year may use 7.5% of AGI through 2016. The increase in the Medical Expense Deduction will remain at 10% when calculating Alternative Minimum Tax liability.

Reduction in Itemized Deductions and phase outs of personal exemptions

In 2014, itemized deductions must be reduced by the lesser of 3% of adjusted gross income in excess of the specified levels below, or 80% of the amount of itemized deductions otherwise allowable.

  • Single: $254,200 in 2014
  • Head of Household: $279,650 in 2014
  • Married Filing Jointly: $305,050 in 2014
  • Married Filing Separately: $152,525 in 2014

Personal exemptions ($3,950 – 2014) are phased out for taxpayers at a rate of 2% for each $2,500 or fraction of $2,500 ($1,250 or fraction of $1,250 for married taxpayers filing separate returns) by which the taxpayer’s AGI exceeds the same levels above.

Depreciation Changes

A change in Bonus and Section 179 Depreciation will affect business entities moving forward as they continue to purchase new equipment.

Section 179 – In 2014, the Section 179 expense drops from $500,000 to $25,000 and the phase out will begin at $200,000 rather than $2,000,000.

Bonus Depreciation – In 2014, there is no bonus depreciation.

Tax Planning

Due to the unique differences in everyone’s tax situations, it is important and recommended that you talk with your tax advisor before making any decisions.

Tax Planning to Help Reduce AGI and/or MAGI

With all of the changes coming into effect for 2014, the following planning strategies can be used to reduce tax liability by deferring income and accelerating deductions into the most beneficial period.

Student Loan Interest Deduction

Above the line deduction of $2,500 of interest on qualified education loans.

For 2014, reduced ratably at MAGI between $130,000 and $160,000 for joint, and $65,000 and $80,000 for others.

Child Tax Credit

  • Taxpayers are allowed a $1,000 child tax credit for each qualifying child under age 17.
  • The amount of the credit allowable is reduced by $50 for each $1,000 (or part of a $1,000) of MAGI above $110,000 for joint filers, $75,000 for single filers, and $55,000 for marrieds filing separately.

In planning, consider the AGI of the current year as well as the estimated MAGI of next year to see if this credit could be available with the acceleration or deferral of income/deductions in either year.

Convert taxable interest to tax-exempt interest

Tax-exempt interest will not be included in AGI (except in determining the taxability of Social Security benefits), and for some individuals, the after-tax amount received from tax-exempt interest might be at least as much as the after-tax amount received from taxable interest.

Convert taxable interest to tax-deferred interest income

Shift funds to U.S. Series EE bonds or inflation-indexed U.S. Series I savings bonds. Interest on Series EE or I bonds isn’t taxed until the bonds mature or are redeemed.

Buy Treasury Bills with term of one-year or less. The income from the Bills won’t be included in gross income until the following year.

Pay off debts

If an individual has both income-generating investments and debts on which he is paying interest, he should consider selling part of his investments and using the proceeds to pay off debt.

  • It reduces AGI
  • Can increase net income due to offsetting deductions

Increase contributions to 401(k) plans, SIMPLE pension plans, etc.

Some individuals may be able to reduce AGI by increasing contributions to retirement plans such as 401(k) plans, SIMPLE pension plans, and Keogh plans.

IRA Contribution

  • Contribute to traditional IRA to decrease AGI
  • Convert to Roth IRA to increase AGI
  • Keep track of value over year to determine if re-characterization is helpful.

Increase contributions to health savings account (HSA)

Individuals who are covered by a qualifying high deductible health plan may make deductible contributions to an HSA, subject to certain limits:

Assuming a full year of coverage, max contribution is:

  • $3,300 for self-only coverage in 2014
  • $6,550 for family coverage in 2014
  • An additional $1,000 may be contributed by individuals over 50
  • Payments can be made anytime.

Defer receipt of year-end bonuses.

An employee who believes a bonus may be coming his way may request that his employer delay payment of any bonus until early in the following year.

Capital Gains

For 2014 and later years, long-term capital gains are taxed at a rate of:

  • 20% if they would be taxed at a rate of 39.6% if they were taxed as ordinary income
  • 15% if they would be taxed at above 15% but below 39.6% if they were taxed as ordinary income
  • 0% if they would be taxed at a rate of 10% or 15% if they were taxed as ordinary income

In addition to these rates, the taxpayer may be subject to the additional unearned income tax of 3.8% based on the Affordable Care Act tax, making the top Capital Gain rate of 23.8%.

Investment Income Surtax

For tax years beginning after 2012, a 3.8% surtax applies to the lesser of (1) net investment income or (2) the excess of modified adjusted gross income (MAGI) over the threshold amount

  • $250,000 for joint filers or surviving spouses,
  • $125,000 for a married individual filing a separate return, and
  • $200,000 for other taxpayers.

The 3.8% surtax applies to a trade or business if it is a passive activity of the taxpayer, or a trade or business of trading in financial instruments or commodities. Does not apply to active activity of any entity. Capital gains are included in the surtax.

Methods to reduce Surtax Liability

The 3.8% surtax applies to income from a passive investment activity. To help reduce the amount of income subject to the surtax the following should be considered:

  • Use Grouping to take advantage of passive activity losses
  • Use Installment Method to spread out gain on sale over multiple years
  • Use like-kind exchanges to defer gains
  • Look at timing for sale of home
  • Recognizes losses to offset gains
  • Use Roth IRAs (not included in MAGI or NII)
  • Conversion to Roth IRA timing
  • Sell securities at a loss to decrease investment gains

Timing considerations for required minimum distributions

Taxpayers who attain age 70 ½ in 2014 are allowed to delay taking their first RMD (i.e., for 2014) until their required beginning date of Apr. 1, 2015.

Taxpayers who are age 70 ½  or older can reduce this year’s taxable RMD, and thereby reduce MAGI, by making a qualified charitable distribution (QCD).

Simplified Option for Home Office Deduction

Continuing in tax year 2014, taxpayers may use a simplified option when figuring the deduction for business use of their home.

Highlights of the simplified option:

  • Standard deduction of $5 per square foot of home used for business (maximum 300 sq. ft.).
  • Allowable home-related itemized deductions claimed in full on Schedule A (For example: mortgage interest, real estate taxes).
  • No home depreciation deduction or later recapture of depreciation for the years the simplified option is used.

Virtual Currency

Virtual currency, unknown just a few years ago, has burst on the scene. In March, the IRS announced that convertible virtual currencies, such as Bitcoin, would be treated as property and not as currency (Notice 2014-21). A taxpayer who receives convertible virtual currency in payment for goods or services must include the fair market value (FMV) of the virtual currency as of the date it is received. Additionally, the IRS will treat convertible virtual currency paid by an employer for service rendered as wages for employment tax purposes.

Affordable Care Act

Individual Mandate

Beginning January 1, 2014, individuals will be required to carry minimum essential coverage. Individuals that fail to have insurance will be subject to a fine of $95 or 1% of taxable income, it will increase to $325 or 2% in 2015 and $695 or 2.5% in 2016.

Employer Mandate

Postponed until 2015. Calculated based on the prior year staffing numbers. Starting on January 1, 2014, businesses with an average of 50 Full Time employees will be required to provide their employees with Affordable Care Act compliant insurance or pay a heavy fine.

Employer and Insurer Reporting

Requires large employers starting in 2015 to file an information return that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the year.

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